UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-24624

CHINDEX INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	13-3097642
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
4340 East West Highway, Suite 1100, Bethesda, Maryland	20814
(Address of principal executive offices)	(Zip Code)

(301) 215-7777

(Registrant’s telephone number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each class of the registrant’s common equity, as of November 8, 2013, was 16,880,355 shares of Common Stock and 1,162,500 shares of Class B Common Stock.

CHINDEX INTERNATIONAL, INC.

INDEX

FORM 10-Q

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):	3
	Consolidated Condensed Balance Sheets as of September 30, 2013 and December 31, 2012	3
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2013 and 2012	4
	Consolidated Condensed Statements of Comprehensive Income (Loss) for the three and nine months ended September, 2013 and 2012	5
	Consolidated Condensed Statements of Stockholders’ Equity for the nine months ended September 30, 2013	6
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	34
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Signatures		37
Exhibits Index

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands except share data)

(Unaudited)

	September 30, 2013		December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	32,624	$	33,184
Restricted cash		2,045		754
Accounts receivable, less allowance for doubtful accounts of $14,087 and $10,612, respectively		21,146		19,564
Receivables from affiliates		2,995		2,110
Inventories of supplies, net		2,946		2,328
Deferred income taxes		4,161		3,209
Other current assets		4,796		3,798
Total current assets		70,713		64,947
Restricted cash and sinking funds		19,086		20,351
Investment in unconsolidated affiliate		33,582		34,847
Property and equipment, net		106,157		97,952
Noncurrent deferred income taxes		833		925
Other assets		3,571		3,428
Total assets	$	233,942	$	222,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	2,960	$	1,586
Accounts payable		6,131		9,520
Payable to affiliates		2,308		1,334
Accrued expenses		18,109		15,540
Other current liabilities		9,839		8,558
Income taxes payable		1,557		2,772
Total current liabilities		40,904		39,310
Long-term debt and convertible debentures		41,268		32,812
Long-term deferred tax liability		262		262
Total liabilities		82,434		72,384
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued		—		—
Common stock, $.01 par value, 28,200,000 shares authorized, including 3,200,000 designated Class B:
Common stock – 16,070,962 and 15,904,836 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		161		159
Class B stock – 1,162,500 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		12		12
Additional paid-in capital		125,495		122,109
Retained earnings		14,574		18,583
Accumulated other comprehensive income		11,266		9,203
Total stockholders’ equity		151,508		150,066
Total liabilities and stockholders’ equity	$	233,942	$	222,450

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands except share and per share data)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Healthcare services revenue	$	43,058		$	37,299		$	130,600		$	108,928
Operating expenses
Salaries, wages and benefits		26,170			21,064			75,667			60,989
Other operating expenses		7,690			5,595			19,156			15,704
Supplies and purchased medical services		5,396			4,532			15,951			13,582
Bad debt expense		1,084			865			3,203			2,260
Depreciation and amortization		2,842			1,797			7,497			5,268
Lease and rental expense		2,650			1,915			7,421			5,602
		45,832			35,768			128,895			103,405
(Loss) income from operations		(2,774	)		1,531			1,705			5,523
Other income and (expenses)
Interest income		246			214			735			487
Interest expense		(424	)		(141	)		(752	)		(356	)
Equity in income (loss) of unconsolidated affiliate		52			(785	)		(1,235	)		(573	)
Miscellaneous income (expense) - net		110			(5	)		147			(5	)
(Loss) income before income taxes		(2,790	)		814			600			5,076
Provision for income taxes		(1,035	)		(1,478	)		(4,609	)		(4,461	)
Net (loss) income	$	(3,825	)	$	(664	)	$	(4,009	)	$	615
Net (loss) income per common share - basic	$	(.23	)	$	(.04	)	$	(.24	)	$	.04
Weighted average shares outstanding - basic		16,703,827			16,404,635			16,612,450			16,338,332
Net (loss) income per common share - diluted	$	(.23	)	$	(.04	)	$	(.24	)	$	.05
Weighted average shares outstanding - diluted		16,703,827			16,404,635			16,612,450			17,621,675

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Net (loss) income	$	(3,825	)	$	(664	)	$	(4,009	)	$	615
Other comprehensive income (loss):
Foreign currency translation adjustment		562			(236	)		2,332			(570	)
Share of other comprehensive (loss) income of unconsolidated affiliate		(102	)		12			(269	)		(152	)
Other comprehensive income (loss)		460			(224	)		2,063			(722	)
Comprehensive loss	$	(3,365	)	$	(888	)	$	(1,946	)	$	(107	)

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands except share data)

(Unaudited)

	Common Stock					Common Stock Class B				Additional Paid In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
	Shares			Amount		Shares		Amount
Balance at December 31, 2012		15,904,836		$	159		1,162,500	$	12	$	122,109		$	18,583		$	9,203		$	150,066
Net loss		—			—		—		—		—			(4,009	)		—			(4,009	)
Foreign currency translation adjustment		—			—		—		—		—			—			2,332			2,332
Share of other comprehensive loss of unconsolidated affiliate		—			—		—		—		—			—			(269	)		(269	)
Stock based compensation		—			—		—		—		3,235			—			—			3,235
Purchase and retirement of restricted stock for tax withholding		(18,705	)		—		—		—		(311	)		—			—			(311	)
Options exercised and issuance of restricted stock, net of restricted stock forfeited		184,831			2		—		—		462			—			—			464
Balance at September 30, 2013		16,070,962		$	161		1,162,500	$	12	$	125,495		$	14,574		$	11,266		$	151,508

The accompanying notes are an integral part of these consolidated condensed financial statements.

6

CHINDEX INTERNATIONAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended September 30,
	2013			2012
OPERATING ACTIVITIES
Net (loss) income	$	(4,009	)	$	615
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		7,497			5,268
Inventory write down		18			42
Provision for doubtful accounts		3,203			2,260
Loss on disposal of property and equipment		20			29
Equity in net loss of unconsolidated affiliate		1,235			573
Deferred income taxes		(774	)		96
Stock based compensation		3,235			2,505
Foreign exchange (gain) loss		(372	)		279
Amortization of debt issuance costs		136			7
Amortization of debt discount		186			186
Changes in operating assets and liabilities:
Accounts receivable		(4,307	)		(5,977	)
Receivables from affiliates		(885	)		(744	)
Inventories of supplies		(577	)		(51	)
Other current assets and other assets		(733	)		(354	)
Accounts payable, accrued expenses, other current liabilities and deferred revenue		(2,784	)		2,734
Payable to affiliates		973			2,287
Income taxes payable		(1,253	)		(274	)
Net cash provided by operating activities		809			9,481
INVESTING ACTIVITIES
Proceeds from redemption of CDs		—			26,530
Purchases of property and equipment		(10,896	)		(21,986	)
Net cash (used in) provided by investing activities		(10,896	)		4,544
FINANCING ACTIVITIES
Restricted cash from (to) IFC RMB loan sinking funds		446			(10,940	)
Restricted cash for Exim loan collateral		—			(8,957	)
Proceeds from debt		11,000			—
Repayment of debt		(1,596	)		—
Payment for debt issuance cost		(441	)		—
Repurchase of restricted stock for income tax withholding		(311	)		(151	)
Proceeds from exercise of stock options		464			16
Net cash provided by (used in) financing activities		9,562			(20,032	)
Effect of foreign exchange rate changes on cash and cash equivalents		(35	)		(269	)
Net decrease in cash and cash equivalents		(560	)		(6,276	)
Cash and cash equivalents at beginning of period		33,184			33,755
Cash and cash equivalents at end of period	$	32,624		$	27,479
Supplemental disclosures of cash flow information:
Cash paid for interest	$	695		$	546
Cash paid for taxes	$	6,685		$	4,626
Non-cash investing and financing activities consist of the following:
Changes in PPE additions included in accounts payable and payable to affiliates	$	2,672		$	4,118

The accompanying notes are an integral part of these consolidated condensed financial statements.

7

CHINDEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1. BASIS OF PRESENTATION

Chindex International, Inc. (“Chindex” or “the Company”), founded in 1981, is an American healthcare company providing healthcare services in China through the operations of United Family Healthcare (“UFH”), a network of private care hospitals and affiliated ambulatory clinics. UFH currently operates in Beijing, Shanghai, Tianjin and Guangzhou.

The accompanying unaudited consolidated condensed financial statements of Chindex International, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Policies and procedures

Consolidation

The consolidated condensed financial statements include the accounts of the Company, its subsidiaries in which the Company has greater than 50 percent ownership, and variable interest entities in which the Company has a controlling financial interest. All intercompany balances and transactions are eliminated in consolidation. Entities in which the Company has less than 50 percent ownership or does not have a controlling financial interest but is considered to have significant influence are accounted for on the equity method.

Use of Estimates

The preparation of the consolidated condensed financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are used include revenue recognition, receivable collectibility, stock-based compensation, and deferred tax valuation allowances.

Revenue Recognition

All revenue is derived from providing healthcare services. Revenue related to services provided is net of contractual adjustments or discounts and is recognized in the period services are provided. The Company makes an estimate at the end of the month for certain inpatients that have not completed service.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-02, a new accounting standard that adds new disclosure requirements for amounts reclassified out of accumulated other

8

comprehensive income (“AOCI”). The total changes in AOCI must be disaggregated between reclassification adjustments and current period other comprehensive income. This new standard also requires an entity to present reclassification adjustments out of AOCI either on the face of the statement of operations or in the notes to the financial statements based on their source and the income statement line items affected by the reclassification. This standard is effective prospectively for the Company for interim and annual periods beginning on January 1, 2013. The adoption of this standard did not have a material effect on the Company’s consolidated condensed financial statements.

Note 2. INVENTORIES OF SUPPLIES, NET

Inventories of supplies consist of medical supplies and pharmaceuticals in the amounts of $2,946,000 at September 30, 2013 and $2,328,000 at December 31, 2012.

Note 3. INVESTMENT IN UNCONSOLIDATED AFFILIATE

Background – Chindex Medical Limited

On December 31, 2010, Chindex and Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (“FosunPharma”), a leading manufacturer and distributor of Western and Chinese medicine and devices in China, completed the first closing (the “Initial Closing”) of the formation of Chindex Medical Limited (“CML”) to independently operate certain combined medical device businesses, including Chindex’s Medical Products division (“MPD”). The formation of CML represents a basis of the strategic alliance between the two companies, which aims to capitalize on the long-term opportunity presented by medical product sectors in China. CML is focused on marketing, distributing, selling and servicing medical devices in China, including Hong Kong, as well as activities in R&D and manufacturing of medical devices for the Chinese and export markets. At the time of formation, CML was owned 51% by FosunPharma and 49% by Chindex.

Upon the Initial Closing, CML became the owner of the Company’s former Medical Products division. On June 24, 2011, CML became the holder of legal title to the FosunPharma-contributed businesses. Notwithstanding this transfer, the registration with and approval of Shanghai Administration of Foreign Exchange (SAFE) was required in order for CML to exercise certain of the rights and benefits as shareholder of such businesses, but CML was entitled to such benefits on a contractual basis under an entrusted management agreement. The registration with and approval of SAFE was received on March 7, 2012, and all legal formalities related to the final closing of the joint venture formation were completed as of March 30, 2012.

Deconsolidation of Chindex MPD

FosunPharma has a controlling financial interest in CML. The Company was required to deconsolidate the MPD-contributed businesses when it ceased to have a controlling financial interest in the applicable subsidiaries. In its analysis, the Company concluded that CML was a voting interest entity, rather than a variable interest entity. Therefore, the reduction of the Company’s interest to 49% on December 31, 2010 indicated that it no longer had a controlling financial interest and needed to deconsolidate under Accounting Standards Codification (“ASC”) 810. Accordingly, Chindex deconsolidated its Medical Products division from its consolidated balance sheet, effective December 31, 2010.

CML Purchase of Interest in Alma Lasers, Inc.

On May 27, 2013, CML acquired approximately 36.17% of Alma Lasers, Inc. (“Alma”) as part of a purchase by a group of buyers for substantially all of Alma. The buying group, which consisted of CML, another subsidiary of FosunPharma, and the Pramerica-Fosun China Opportunity Fund, acquired 95.16% of Alma indirectly through a jointly-owned entity, Sisram Medical, Ltd. The total acquisition price by all buyers for Alma was approximately $221.6 million. Alma is a leading global medical energy-based (including lights, laser, radio frequency and ultrasonic) device

9

manufacturer, with a comprehensive product offering and international sales network. Alma has developed leading R&D capabilities globally in the medical and aesthetic equipment manufacturing field and established a global brand in the market segment.

In order to help fund the acquisition by CML of its interest in Alma, FosunPharma invested approximately $41 million in cash into CML for additional equity in CML. Chindex International waived its right to participate in the additional investment of capital into CML and also agreed to increase FosunPharma’s board seats at CML from four of seven to five of eight. Following such investment, the cumulative net assets contributed by each party to CML since inception were approximately 70% by FosunPharma and 30% by Chindex. After consideration of the relative net assets contributed to CML by each investor, the parties agreed that the equity interests should be revised to 70% for FosunPharma and 30% for Chindex. Since the resulting basis for Chindex approximated its equity interest in CML, there was no gain or loss recognized by Chindex on the revised equity percentages, as the amount was de minimis.

Summarized Financial Information for CML-Unconsolidated Affiliate

Chindex follows the equity method of accounting to recognize its interest in CML. The Chindex interest in CML at the time of formation on December 31, 2010 was initially 49% and, was subsequently changed to 30%, effective April 29, 2013. Summarized financial information for the unconsolidated CML affiliate for which the equity method of accounting is used is presented below on a 100 percent basis.

The assets and liabilities of CML as of September 30, 2013 and December 31, 2012 were as follows (in thousands):

	September 30, 2013		December 31, 2012
Current assets	$	138,041	$	91,184
Noncurrent assets		232,093		19,745
Total assets	$	370,134	$	110,929
Current liabilities	$	140,816	$	43,287
Noncurrent liabilities		105,194		1,526
Total liabilities		246,010		44,813
Stockholders’ equity		124,124		66,116
Total liabilities and stockholders’ equity	$	370,134	$	110,929

The operating results of CML for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

	Three months ended September 30,					Nine months ended September 30,
	2013		2012			2013			2012
Revenue	$	46,137	$	28,493		$	104,099		$	85,991
Income (loss) before income taxes		319		(1,221	)		(2,125	)		178
Net income (loss)		489		(1,339	)		(1,921	)		(381	)

The operating results of CML in 2013 have thus far been significantly impacted by restructuring at the Ministry of Health, uncertainty surrounding proposed reforms and the disruption to normal hospital purchasing activity due to the government campaign to improve compliance in the public hospitals’ purchasing activities, all of which has led to an overall slowdown in business activity among capital medical equipment markets in China.

10

CML is a 70%-owned subsidiary of FosunPharma. The assets, liabilities and stockholders’ equity in the summarized financial data table presented above for CML have been prepared on a stand-alone basis, with the assets and liabilities of the entities contributed to CML by FosunPharma reported on a historical cost basis, while the assets and liabilities acquired from Chindex have been recorded on a fair value basis. In reporting its interest in the net assets and net (losses) earnings of CML using the equity method of accounting, Chindex includes its interest in the stand-alone financial statements of CML, and also records adjustments to reflect the amortization of basis differences attributable to the fair values in excess of net book values of identified tangible and intangible assets contributed by FosunPharma to CML at its formation date and also includes the amortization of acquisition accounting adjustment to reflect fair values in connection with CML’s investment in the net assets of Sisram (Alma). In addition, certain employees of CML participate in Chindex stock-based compensation programs. The expense for these stock options or restricted stock is recognized by CML as the services are provided. The total stock-based compensation expense recognized by CML for three months ended September 30, 2013 and 2012 were $438,000 and $346,000, respectively. The total stock-based compensation expense recognized by CML for nine months ended September 30, 2013 and 2012 were $1,301,000 and $846,000, respectively.

As of September 30, 2013 and December 31, 2012, Chindex had a receivable from CML entities of $2,995,000 and $2,110,000, respectively, primarily related to advance payments for procurement of medical equipment supplied under a logistics service agreement whereby CML serves as an agent for Chindex. As of September 30, 2013 and December 31, 2012, Chindex had a payable to CML entities of $2,308,000 and $1,334,000, respectively, which represented the actual purchases of medical equipment by CML on behalf of Chindex under the logistics service agreement.

Services Agreement

CML and Chindex entered into a services agreement (the “Services Agreement”), effective January 1, 2011. Under the Services Agreement, Chindex provides advice and support services as requested by CML. The services include management and administrative support services for marketing, sales and order fulfillment activities conducted in the United States and China, order processing and exporting of goods sold to customers in China, advice relating to the marketing of products sold in China by CML, analysis of sales opportunities and other assistance including services such as payroll, database administration, internal auditing, accounting and finance that will assist CML in carrying out its activities in the United States and China. For the three months ended September 30, 2013 and 2012, total expenses recognized by CML under the services agreement were $794,000 and $865,000, respectively, in addition to stock-based compensation. For the nine months ended September 30, 2013 and 2012, total expenses recognized by CML under the services agreement were $2,844,000 and $2,582,000, respectively, in addition to stock-based compensation.

Note 4. RESTRICTED CASH AND SINKING FUNDS

Restricted cash and sinking funds at September 30, 2013 and December 31, 2012 consist of the following:

(in thousands)

	September 30, 2013		December 31, 2012
Current
IFC RMB loan interest collateral	$	446	$	436
China Exim loan collateral		1,599		318
	$	2,045	$	754
Noncurrent
IFC RMB loan sinking fund	$	11,446	$	12,069
China Exim loan collateral - Certificates of Deposit		7,640		8,282
	$	19,086	$	20,351

11

The China Exim loan collateral of $1,599,000 consists of a number of deposits for the China Exim loan with an interest rate of 3% per annum, and the term of the deposits is from July 2013 to August 2014. The IFC RMB loan interest collateral of $446,000 consists of a deposit for the IFC RMB loan with an interest rate of 4.4% per annum, and the term of the deposit is from March 2013 to March 2014.

The IFC RMB loan sinking fund consists of Certificates of Deposit (CDs) for the advance funding of the loan principal and interest for the Company’s IFC 2005 RMB loan from the International Finance Corporation (IFC). As of September 30, 2013, the CDs totaled $11,446,000, and are recorded in long-term restricted cash and sinking funds. The RMB debt is also classified as long-term and will be paid off as originally scheduled on October 15, 2015. The CDs in the amount of $11,446,000 has an interest rate of 5%, and the term of the CDs are from March 22, 2012 to March 22, 2015.

In June 2011, the Company entered into a contract for the purchase of $11.1 million of medical equipment to be used at our newly expanded hospital facilities in Beijing. The equipment was primarily sourced from the United States. Since the equipment is for qualified government-sponsored projects under financing agreements between the U.S. Export-Import Bank and China’s Ministry of Finance, the Company may import the equipment into China on a duty and VAT free basis. The Company entered into loan agreements for the principal amount of $11.1 million, with a term of seven years, an interest rate of 2.15%, and a collateral cash deposit of approximately $7.6 million. Certificates of Deposit in a restricted account at a major bank in China were opened in June 2012 to provide the collateral for the expected draw of $11.1 million under the loan agreements. The Certificates of Deposit earn interest at a rate of 3.05% as of September 30, 2013, and the interest rate is reset every six months based on the bank’s standard rates. The remaining steps to draw the principal of the loan were completed and the entire $11.1 million was drawn on October 18, 2012.

Note 5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:

(in thousands)

	September 30, 2013			December 31, 2012
Furniture and equipment	$	51,667		$	44,089
Vehicles		288			355
Construction in progress		3,403			21,478
Leasehold improvements		81,479			54,907
		136,837			120,829
Less: accumulated depreciation and amortization		(30,680	)		(22,877	)
	$	106,157		$	97,952

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Construction in progress relates to the development of the United Family Healthcare network of private hospitals and health clinics in China, including facilities and systems development. Additions incurred during the year pertained to the completion of the construction of the Beijing Rehabilitation Hospital and new clinics in Beijing and Shanghai. Remaining costs to complete major construction activities in progress are approximately $32 million. Capitalized interest on construction in progress was $35,000 and $71,000 during the three months ended September 30, 2013 and 2012, respectively. Capitalized interest on construction in progress was $193,000 and $229,000 during the nine months ended September 30, 2013 and 2012, respectively. Depreciation and amortization expense for property and equipment for the three months ended September 30, 2013 and 2012 were $2,842,000 and $1,797,000, respectively. Depreciation and amortization expense for property and equipment for the nine months ended September 30, 2013 and 2012 were $7,497,000 and $5,268,000, respectively.

Note 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

(in thousands)

	September 30, 2013		December 31, 2012
Accrued expenses:
Accrued expenses- rent	$	8,278	$	6,125
Accrued compensation		7,394		7,007
Accrued expenses- other		2,437		2,408
	$	18,109	$	15,540
Other current liabilities:
Accrued other taxes payable- non-income	$	1,150	$	992
Customer deposits		5,869		4,754
Other current liabilities		2,820		2,812
	$	9,839	$	8,558

Note 7. DEBT

The Company’s short-term and long-term debt balances are (in thousands):

	September 30, 2013				December 31, 2012
	Short term		Long term		Short term		Long term
IFC 2005 RMB loan	$	—	$	10,553	$	—	$	10,322
IFC 2013 loan		750		5,250		—		—
China Exim loans		1,585		7,136		1,586		8,722
DEG 2013 loan		625		4,375		—		—
Convertible notes JPM, net of debt discount		—		13,954		—		13,768
	$	2,960	$	41,268	$	1,586	$	32,812

IFC 2005 RMB loan

In October 2005, Beijing United Family Hospital (BJU) and Shanghai United Family Hospital (SHU), majority-owned subsidiaries of the Company, obtained long-term debt financing under a program with the International Finance Corporation (IFC) (a division of the World Bank) for 64,880,000 Chinese Renminbi (“RMB”) (approximately $8,000,000) (the “IFC 2005 RMB Loan”). The term of the loan was 10 years at an initial interest rate of 6.73% with the borrowers required to make annual payments into a sinking fund with the first payment in September 2010. Deposits

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into the sinking fund would have accumulated until a lump sum payment was made at maturity of the debt in October 2015. The interest rate would have reduced to 4.23% for any amount of the outstanding loan on deposit in the sinking fund.

Effective March 14, 2012, the Company entered into an Amendment and Restatement Agreement to the IFC 2005 RMB Loan Agreement, and a Certificate of Deposit Retention and Pledge Agreement. The agreements were necessary in order to incorporate the effects of the expansion of the Beijing hospital campus on the collateral and loan covenant provisions of the original IFC 2005 RMB Loan Agreement. The revised terms of the agreements provide for (1) advance funding by the Company of the full principal and interest amounts by the purchase of a series of Certificates of Deposit having a face amount equal to the full principal and interest amount and the subsequent pledge of such Certificates of Deposit to the IFC, and (2) significant reduction of loan covenants required under the original loan agreement. The advance funding of the loan principal and interest by the Company into restricted accounts rather than paying off the debt was necessary in order to avoid significant prepayment penalties. As of September 30, 2013, the Certificates of Deposit totaled $11,446,000 and are recorded in long-term restricted cash and sinking funds. The RMB debt is classified as long-term and will be paid off as originally scheduled on October 15, 2015.

As of September 30, 2013, the outstanding balance of this debt was 64,880,000 RMB (current translated value of $10,553,000) and was classified as long-term. As the advance funding of the sinking fund does not extinguish the long-term debt liability, the entire loan is expected to be classified as long-term until a financial reporting date that is less than one year from final maturity. The balance sheet classification of the sinking fund assets is similarly noncurrent, until a date that is less than one year from the lump sum payment.

Convertible Notes- JPM

On November 7, 2007, the Company entered into a securities purchase agreement with Magenta Magic Limited, a wholly owned subsidiary of J.P. Morgan Chase & Co organized under the laws of the British Virgin Islands (JPM), pursuant to which the Company agreed to issue and sell to JPM: (i) 538,793 shares (the “Tranche A Shares”) of the Company’s common stock; (ii) the Company’s Tranche B Convertible Notes due 2017 in the aggregate principal amount of $25 million (the “Tranche B Notes”) and (iii) the Company’s Tranche C Convertible Notes due 2017 in the aggregate principal amount of $15 million (the “Tranche C Notes” and, with the Tranche B Notes, the “Notes”) at a price of $18.56 per Tranche A Share (for an aggregate price of $10 million for the Tranche A Shares) and at face amount for the Notes for a total purchase price of $50 million in gross proceeds (the “JPM Financing”).

The Tranche B Notes had a ten-year maturity, bore no interest of any kind and provided for conversion into shares of the Company’s common stock at an initial conversion price of $18.56 per share at any time and automatic conversion upon the Company entering into one or more newly committed financing facilities (the “Facilities”) making available to the Company at least $50 million, pursuant to which Facilities all conditions precedent (with certain exceptions) for initial disbursement had been satisfied, subject to compliance with certain JPM Financing provisions. The Facilities as required for conversion of the Tranche B Notes had to have a minimum final maturity of 9.25 years from the date of initial drawdown, a minimum moratorium on principal repayment of three years from such date, principal payments in equal or stepped up amounts no more frequently than twice in each 12-month period, no sinking fund obligations, and also limit the purchase price of any equity issued under the Facilities to at least equal to the initial conversion price of the Notes or higher amounts depending on the date of issuance thereof. In January 2008, the Tranche B Notes were converted into 1,346,984 shares of our common stock.

The Tranche C Notes had a ten-year maturity, bore no interest of any kind and provided for conversion into shares of the Company’s common stock at the same conversion price as the Tranche B Notes at any time and automatic conversion upon the (i) completion of two proposed new and/or expanded hospitals in China in Beijing and Guangzhou (the “JV Hospitals”), (ii) the first anniversary of commencement of operations at either of the JV Hospitals or (iii) the first anniversary of either of the JV Hospitals achieving break-even earnings before interest, taxes, depreciation and amortization for any 12-month period ending on the last day of a fiscal quarter, subject to compliance with certain JPM Financing provisions. The operations of the first JV hospital in Beijing commenced on October 15, 2012. On October 15, 2013, the Tranche C Notes were automatically converted. Accordingly, the $15 million debt was converted into 808,189 shares of the Company’s common stock, and the debt was extinguished.

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The JPM Financing was completed in two closings. At the first closing, which took place on November 13, 2007, the Company issued (i) the Tranche A Shares, (ii) the Tranche B Notes and (iii) an initial portion of the Tranche C Notes in the aggregate principal amount of $6 million, with the closing of the balance of the Tranche C Notes in the aggregate principal amount of $9 million subject to, among other things, the approval of the Company’s stockholders. At the second closing, which took place on January 11, 2008, following such stockholder approval, the Company issued such balance of the Tranche C Notes.

In connection with the issuance of the Notes, the Company incurred issuance costs of $314,000, which primarily consisted of legal and other professional fees, which were capitalized. Of these costs, $61,000 was attributable to the Tranche A shares, $159,000 was attributable to Tranche B Notes which converted in January 2008 and the remaining $94,000 is attributable to the Tranche C Notes and has been capitalized to be amortized over the life of the Notes. As of September 30, 2013 and December 31, 2012, the unamortized financing cost was $38,000 and $45,000, respectively, and is included in Other Assets in the consolidated condensed balance sheets.

The Company accounts for convertible debt in accordance with ASC 470-20. Accordingly, the Company recorded, as a discount to convertible debt, the intrinsic value of the conversion option based upon the differences between the fair value of the underlying common stock at the commitment date and the effective conversion price embedded in the note. Debt discounts under these arrangements are usually amortized over the term of the related debt to their stated date of redemption. So, in respect to the Notes, this debt discount would be amortized through interest expense over the 10 year term of the Notes unless earlier converted or repaid. In fiscal 2008, under this method, the Company recorded (i) a discount on the Tranche B Notes of $2,793,000 against the entire principal amount of the Notes; and (ii) a discount on the Tranche C Notes of $2,474,000 against the entire principal amount of the Notes.

The debt discount pursuant to the Notes as of September 30, 2013 and December 31, 2012 was $1,046,000 and $1,232,000, respectively. Amortization of the discount was approximately $62,000 and $186,000 for the three and nine months ended September 30, 2013 and 2012, respectively.

IFC 2013 Loan

In March 2013, the Company entered into a $6,000,000 US Dollar loan facility with IFC for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $6,000,000 from this facility. The loan bears interest at the three-month LIBOR rate plus a spread of 4.7%. The loan duration is five years, with a one-year grace period. Principal payments will be made on a quarterly basis, beginning on June 15, 2014 through March 15, 2018. The obligations of the borrower (BJU) under the IFC facility is guaranteed by Chindex and secured by a pledge of Chindex’s ownership interest in the borrower. The issuance costs of $1.1 million were capitalized and are being amortized over the 5-year life of the loan. Amortization of the issuance costs was approximately $75,000 for the three and nine months ended September 30, 2013. The IFC Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, engage in transactions with affiliates, and make capital expenditures. The IFC Facility also contains customary events of default. As of September 30, 2013, the Company was in compliance with the loan covenants.

In addition, we have submitted proposals to the IFC for additional loans of approximately $12 million related to the development of our rehabilitation hospital in Beijing. There can be no assurances as to the amounts, if any, that may be finally available under this loan or other facilities or whether such loan or other facilities will be finally achievable on terms acceptable to us and the lenders. If the ongoing negotiations are unsuccessful and this loan or other facilities are not obtained for expansion projects, then, in the absence of alternative sources of financing, there could result a material adverse effect on our operations and our ability to complete our proposed expansion projects on time or at all.

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DEG 2013 Loan

In March 2013, the Company entered into a $5,000,000 US Dollar loan facility with Deutsche Investitions und Entwicklungsgesellschaft (DEG) for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $5 million from this facility. The loan bears interest at the three-month LIBOR rate plus a spread of 4.7%. The loan duration is five years, with a one-year grace period. Principal payments will be made on a quarterly basis, beginning on June 15, 2014 through March 15, 2018. The obligations of the borrower (BJU) under the DEG facility is guaranteed by Chindex and secured by a pledge of Chindex’s ownership interest in the borrower. The issuance costs of $296,000 were capitalized and are being amortized over the 5-year life of the loan. Amortization of the issuance was approximately $20,000 for the three and nine months ended September 30, 2013. The DEG Facility contains customary financial covenants, including maintenance of a maximum ratio of liabilities to tangible net worth and a minimum debt service coverage ratio, and covenants that, among other things, place limits on the Company’s ability to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, engage in transactions with affiliates, and make capital expenditures. The DEG Facility also contains customary events of default. As of September 30, 2013, the Company was in compliance with the loan covenants.

China Exim Loans

In June 2011, the Company entered into a contract for the purchase of $11.1 million of medical equipment to be used at our newly expanded hospital facilities in Beijing. The equipment was primarily sourced from the United States. As qualified government-sponsored projects under financing agreements between the U.S. Export-Import Bank and China’s Ministry of Finance, this would allow the Company to import the equipment into China on a duty and VAT free basis. The Company entered into loan agreements with Export-Import Bank of China (“China Exim”) for the principal amount of $11.1 million, with a term of seven years, an interest rate of 2.15%, and a collateral cash deposit of approximately $8.0 million. Certificates of Deposit in a restricted account were opened in June 2012 to provide the collateral for the expected draw of $11.1 million under the loan agreements. The remaining steps to draw the principal of the loan were completed and the entire $11.1 million was drawn on October 18, 2012. The issuance costs of $297,000 were capitalized and are being amortized over the 7-year lives of the loans. Amortization of the issuance was approximately $11,000 and $34,000 for the three and nine months ended September 30, 2013, respectively.

Debt Payments Schedule

The following table sets forth the Company’s debt obligations as of September 30, 2013:

(In thousands)

	Total		2014		2015		2016		2017		2018		Thereafter
IFC 2005 loan	$	10,553	$	—	$	10,553	$	—	$	—	$	—	$	—
IFC 2013 loan		6,000		1,125		1,500		1,500		1,500		375		—
China Exim loans		8,720		1,585		1,586		1,586		1,586		1,586		791
DEG 2013 loan		5,000		938		1,250		1,250		1,250		312		—
Convertible notes		15,000		—		—		—		15,000		—		—
Total	$	45,273	$	3,648	$	14,889	$	4,336	$	19,336	$	2,273	$	791

Note 8. TAXES

We recorded a $1,035,000 provision for taxes in the three months ended September 30, 2013 compared to a provision for taxes of $1,478,000 for the three months ended September 30, 2012. We recorded a $4,609,000 provision for taxes in the nine months ended September 30, 2013 compared to a provision for taxes of $4,461,000 for the nine months ended September 30, 2012. The effective tax rate was calculated in accordance with ASC 740-270. Our tax expense includes the effect of losses in entities for which we cannot recognize a benefit in accordance with the provisions of ASC 270 and ASC 740-270 and the effect of valuation allowance for deferred tax assets.

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The Company’s effective tax rate is higher in the three and nine months ended September 30, 2013 than in the three and nine months ended September 30, 2012. The table below provides detail into our consolidated pretax income (loss) and provision for income tax by separating this information into three categories: operating entities, start-up entities and corporate entities. Our operating entities consist of our established hospitals and clinics in China, and which therefore record tax expense at the China statutory rate of approximately 25%. Our start up entities in the table below primarily consists of our hospital in Tianjin and the newly-opened Rehabilitation Hospital in Beijing, and no tax benefit has been recorded for the effect of the start up losses for those entities. Our parent company and subsidiary holding companies, referred to as the corporate entities in the table below, have incurred losses for which no tax benefits were recorded.

(in thousands)

Period ended September 30, 2013
	Three months								Nine months
	Income (loss) Before Income Taxes			Provision for Income Taxes		Effective Tax Rate			Income (loss) Before Income Taxes			Provision for Income Taxes		Effective Tax Rate
Operating Entities	$	2,947		$	1,021		35	%	$	14,194		$	4,575		32	%
Start-Up Entities		(3,783	)		—		0	%		(8,028	)		—		0	%
Corporate Entities		(1,954	)		14		–1	%		(5,566	)		34		–1	%
Total	$	(2,790	)	$	1,035		–37	%	$	600		$	4,609		768	%

Period ended September 30, 2012
	Three months									Nine months
	Income (loss) Before Income Taxes			Provision for Income Taxes			Effective Tax Rate			Income (loss) Before Income Taxes			Provision for Income Taxes			Effective Tax Rate
Operating Entities	$	4,476		$	1,618			36	%	$	15,363		$	4,574			30	%
Start-Up Entities		(2,001	)		—			0	%		(6,935	)		—			0	%
Corporate Entities		(1,661	)		(140	)		8	%		(3,352	)		(113	)		3	%
Total	$	814		$	1,478			182	%	$	5,076		$	4,461			88	%

We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2013 and December 31, 2012, we had no accrued interest or penalties related to uncertain tax positions.

Note 9. EARNINGS PER SHARE

The Company follows ASC 260 whereby basic earnings per share excludes any dilutive effects of options, restricted stock, performance restricted stock units and convertible securities and diluted earnings per share includes such effects. The Company does not include the effects of stock options, restricted stock, performance restricted stock units and convertible securities for periods when such an effect would be antidilutive.

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The following is a reconciliation of the numerators and denominators of the basic and diluted Earnings per Share (EPS) computations for net (loss) income and other related disclosures (in thousands, except for share and per share data):

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Basic net (loss) income per share computation:
Numerator:
Net (loss) income	$	(3,825	)	$	(664	)	$	(4,009	)	$	615
Denominator:
Weighted average shares outstanding- basic		16,703,827			16,404,635			16,612,450			16,338,332
Net (loss) income per common share - basic:	$	(.23	)	$	(.04	)	$	(.24	)	$	.04
Diluted net (loss) income per share computation:
Numerator:
Net (loss) income	$	(3,825	)	$	(664	)	$	(4,009	)	$	615
Interest expense for convertible notes		62			62			186			186
Numerator for diluted (loss) income per share	$	(3,763	)	$	(602	)	$	(3,823	)	$	801
Denominator:
Weighted average shares outstanding- basic		16,703,827			16,404,635			16,612,450			16,338,332
Effect of dilutive securities:
Shares issuable upon exercise of dilutive outstanding stock options, conversion of convertible debentures, vesting of restricted stock and PRSUs:		—			—			—			1,283,343
Weighted average shares outstanding-diluted		16,703,827			16,404,635			16,612,450			17,621,675
Net (loss) income per common share - diluted:	$	(.23	)	$	(.04	)	$	(.24	)	$	.05

For the three months ended September 30, 2013 and 2012, there were 90,000 and 622,394 shares, respectively, which were not included in the calculation of diluted net loss per share as the effect would have been antidilutive. For the nine months ended September 30, 2013 and 2012, there were 123,000 and 1,038,683 shares, respectively, which were not included in the calculation of diluted net (loss) income per share as the effect would have been antidilutive.

During the first quarter of 2012, the Company granted performance-based restricted stock units (“PRSU”) awards representing at target approximately 214,000 shares. The Company includes the shares underlying the PRSU awards in the calculation of diluted EPS when they become contingently issuable and excludes such shares when they are not contingently issuable. Based on the achievement of results in excess of targets, 286,760 PRSUs was earned on December 31, 2012 and were included in the calculation of diluted EPS on a prorated basis for the three and nine months ended September 30, 2013.

During the first quarter of 2013, the Company granted PRSU awards representing at target approximately 147,800 shares. The Company includes the shares underlying the PRSU awards in the calculation of diluted EPS when they become contingently issuable and excludes such shares when they are not contingently issuable. For the three and nine months ended September 30, 2013, the Company has excluded such shares when calculating the diluted EPS as the performance conditions underlying the awards have not yet been satisfied.

Note 10. STOCKHOLDERS’ EQUITY

Stock-Based Compensation

The Company incurred stock based compensation expense of $1,001,000 and $3,235,000 for the three and nine months ended September 30, 2013, respectively, and $904,000 and $2,505,000 for the three and nine months ended September 30, 2012, respectively, for Company employees and outside directors.

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The Company granted restricted shares in the second quarter of 2013 that vest over a three-year period. In 2012, the Company granted restricted stock that vests over a three or five year period to certain employees. The Company also granted restricted stock to independent directors of 31,021 and 51,715 shares in May 2013 and 2012, respectively. Option awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Stock options have up to 10-year contractual terms. The Company recognizes expense ratably over the vesting period of the stock options or restricted stock, net of estimated forfeitures. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.

The Company calculates grant-date fair values using the Black-Scholes option pricing model. To calculate fair market value, this model utilizes certain information, such as the interest rate on a risk-free security maturing generally at the same time as the expected life of the option being valued and the exercise price of the option being valued. It also requires certain assumptions, such as the expected amount of time the option will be outstanding until it is exercised or it expires and the expected volatility of the Company’s common stock over the expected life of the option.

The following table summarizes the stock option activity during the nine months ended September 30, 2013:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)*
Options outstanding at December 31, 2012		1,131,140		$	10.72
Granted		—			—
Exercised		(41,650	)		11.13
Canceled		(1,475	)		13.31
Expired		(6,525	)		13.31
Options outstanding at September 30, 2013		1,081,490		$	10.69		3.99	$	7,071
Options exercisable at September 30, 2013		1,065,458		$	10.63		3.94	$	7,029

* The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market price of the Company’s common stock on September 30, 2013 ($17.04) and the exercise price of the underlying options.

During the nine months ended September 30, 2013 and 2012, the total intrinsic value of stock options exercised was $248,000 and $77,000, respectively, and the actual cash received upon exercise of stock options was $464,000 and $16,000, respectively. The unamortized fair value of the stock options as of September 30, 2013 was $76,000, the majority of which is expected to be expensed over the weighted-average period of 1.53 years.

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The following table summarizes activity relating to restricted stock for the nine months ended September 30, 2013:

	Number of shares underlying restricted stock			Aggregate Intrinsic Value of Restricted Stock (in thousands)*
Outstanding at December 31, 2012		517,550
Granted		157,566
Vested		(163,773	)
Forfeited		(14,385	)
Outstanding at September 30, 2013		496,958		$	8,468
Expected to vest		457,581		$	7,797

* The aggregate intrinsic value on this table was calculated based on the closing market price of the Company’s common stock on September 30, 2013 ($17.04).

The weighted average remaining contractual term of the restricted stock, calculated based on the service-based term of each grant, is approximately two years. As of September 30, 2013, the unamortized fair value of the restricted stock was $5,120,000. This unamortized fair value is expected to be expensed over the weighted-average period of 2.14 years. Restricted stock is valued at the stock price on the date of grant.

Long-Term Incentive Plans

The Company has two long-term incentive plans in progress. Each plan has required performance, service and market conditions, as described below.

2013 LTIP

On March 27, 2013, the Company’s Compensation Committee, with the assistance of its independent executive compensation consultant, adopted a new long-term incentive program (“2013 LTIP”) under our amended and restated 2007 Stock Incentive Plan (the “Plan”) for 2013 grants to executive officers and other key employees of performance-based restricted stock units (“PRSUs”). The new program closely aligns the equity compensation paid to participants with the achievement of pre-set quantitative metrics. The new program also is intended to enable our equity awards to be deductible as performance-based compensation in accordance with Section 162(m) of the Code.

The awards under the 2013 LTIP are initially expressed as a target number of units. The target number of units will be adjusted to reflect the attainment of the Company’s performance metrics during the applicable performance period, which in the case of the awards granted for the 2013 LTIP, will be the combined calendar years 2013 and 2014. The performance metrics used for these awards are Revenue and Adjusted EBITDA, with the adjustment to the target number of units based on a combination of the level of performance on these metrics, ranging from zero if performance did not meet specified levels up to a maximum of 150% of the target number of units. The number of units so determined will be increased or decreased by up to 25% based on the Company’s stock performance during 2013 and 2014 relative to the performance of the NASDAQ Golden Dragon China Index. The number of units earned after this adjustment are subject to vesting based on continued employment, with one-half of the units vesting at the end of each of 2015 and 2016, subject to accelerated vesting in specified events. Upon the vesting of a unit, the award holder will receive one share of our common stock in settlement of that unit. The target number of PRSUs awarded under the 2013 LTIP was 147,800 units. Upon the completion of the service period, vested PRSUs will be settled by the delivery of Chindex common stock. Compensation expense is based on the estimated fair value of the PRSUs at the grant date, using a Monte Carlo simulation and will be recognized over the combined performance and service periods of approximately 3.75 years, beginning on March 27, 2013. The Company recognized expense of $168,000 and $341,000 in the three and nine months ended September 30, 2013, respectively.

There was no comparable expense in the prior year period. Based on our estimates as of September 30, 2013, the unamortized fair value of the PRSUs expected to be awarded was $1,782,000. This unamortized fair value is expected to be expensed over the period through December 31, 2016, as adjusted to reflect the actual number of PRSUs awarded.

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2012 LTIP

The 2012 LTIP is similar to the 2013 LTIP, as both programs have four-year durations. However, the 2012 LTIP has a one-year performance period and three-year service period subsequent to the performance period, whereas the 2013 LTIP has a two-year performance period and a two-year service period subsequent to the performance period. The one-year performance period for the 2012 LTIP was completed on December 31, 2012. Actual financial results in 2012 exceeded targets, and the value of the Earned PRSUs will be amortized over the remaining service period through December 31, 2015. Expense for the 2012 LTIP in the three months ended September 30, 2013 and 2012, net of amount invoiced to CML, was $237,000 and $110,000, respectively. Expense for the 2012 LTIP in the nine months ended September 30, 2013 and 2012, net of amount invoiced to CML, was $700,000 and $438,000, respectively. Based on our estimates as of September 30, 2013, the unamortized fair value of the PRSUs expected to be awarded was $1,256,000. This unamortized fair value is expected to be expensed over the period through December 31, 2015, as adjusted to reflect the actual number of PRSUs awarded.

Note 11. STOCK PURCHASE AGREEMENT – FOSUNPHARMA

On June 14, 2010, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Fosun Industrial Co., Limited (the “Investor”) and Shanghai Fosun Pharmaceutical (Group) Co., Ltd (“FosunPharma”). Pursuant to the Stock Purchase Agreement, the Company agreed to issue and sell to Investor a total of 1,990,447 shares (the “Shares”) of the Company’s common stock (representing approximately 10% of all outstanding common stock after such sale, based on the number of outstanding shares as of the date of the Stock Purchase Agreement) at a purchase price of $15 per share.

Pursuant to the Stock Purchase Agreement, the sale of the Shares would be completed in two closings. The initial closing occurred on August 27, 2010, at which the Company issued 933,022 Shares to Investor for an aggregate purchase price of $13,995,330 or $13,803,000 net of transaction costs. At the second closing (the “Second Closing”) under the Stock Purchase Agreement, the Company would sell the remaining 1,057,425 Shares to Investor for an aggregate purchase price of $15,861,375. The Second Closing has been subject to the consummation of CML, which was initially formed effective December 31, 2010 and has been fully consummated. CML engages in the businesses of, among other things, (i) the marketing, distribution and servicing of medical equipment in China and Hong Kong (except that sales and distribution related activities in relation to sales and servicing in China and Hong Kong may take place in other jurisdictions) and (ii) the manufacturing, marketing, sales and distribution of medical devices and medical equipment and consumables, including our former Medical Products division. CML was previously 51%-owned by FosunPharma and 49%-owned by the Company, and is now owned, effective April 29, 2013, 70% by FosunPharma and 30% by the Company. The Stock Purchase Agreement further provides that in the event that CML were not consummated within a prescribed period, then the Stock Purchase Agreement may be terminated by either party solely with respect to the Second Closing, provided the absence of such consummation was not principally caused by the terminating party. Although the prescribed period elapsed prior to the consummation of CML, no party has terminated the Stock Purchase Agreement. Nonetheless, as a practical matter, as a result of such elapse, either party may elect such termination (subject to such proviso), and thus there is no obligation to consummate the Second Closing.

At the initial closing under the Stock Purchase Agreement, the Company, Investor and FosunPharma also entered into a stockholder agreement (the “Stockholder Agreement”). Under the Stockholder Agreement, until the first to occur of (i) Investor holds 5% or less of the outstanding shares of common stock, (ii) there shall have been a change of control of the Company as defined in the Stockholder Agreement, and (iii) the seventh anniversary of the initial closing, Investor has agreed to vote its shares in accordance with the recommendation of the Company’s Board of Directors on any matters submitted to a vote of the stockholders of the Company relating to the election of directors and compensation matters and with respect to certain proxy or consent solicitations. The Stockholder Agreement also contains standstill restrictions on Investor generally prohibiting the purchase of additional securities of the Company. The standstill restrictions terminate on the same basis as does the voting agreement above, except that the 5% standard would increase to 10% upon the Second Closing. In addition, the Stockholder Agreement contains a lock-up restricting sales by Investor of its shares of the Company’s common stock for a period of five years following the date of the Stockholder Agreement, subject to certain exceptions.

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Upon the Second Closing, Investor would have the right to, among other things, nominate two designees for election to the Company’s Board of Directors, which would be increased to nine members. Further, such final portion of the Shares to be purchased by FosunPharma would be subject to the terms of the Stockholder Agreement, which currently governs other shares of the Company’s common stock held by Fosun entities. In order to induce Investor to enter into the transaction and without any consideration therefore, each of the Company’s chief executive officer, secretary and chief financial officer holding such offices as of the date of the Stock Purchase Agreement, in their capacities as stockholders of the Company, agreed to certain limitations on his or her right to dispose of shares of the Company’s common stock and to vote for the Investor’s board nominees.

The Company evaluated whether this contingent Stock Purchase Agreement should be accounted for as a derivative instrument or whether it qualified for a scope exception under ASC 815-10. The Company concluded that the contract qualified for the scope exception because the contract was indexed to the Company’s own stock and was classified in stockholders’ equity.

Note 12. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space, warehouse space, and space for hospital and clinic operations under operating leases. Future minimum payments under these non-cancelable operating leases consist of the following (in thousands):

Three months ending December 31,
2013	$	2,558
Year ending December 31,
2014		9,141
2015		8,771
2016		7,510
2017		7,164
Thereafter		68,135
Net minimum rental commitments	$	103,279

The above leases require the Company to pay certain pass through operating expenses and rental increases based on inflation.

Rental expense was approximately $2,650,000 and $1,915,000 for the three months ended September 30, 2013 and 2012, respectively. Rental expense was approximately $7,421,000 and $5,602,000 for the nine months ended September 30, 2013 and 2012, respectively.

Contingencies

The Company is involved in various claims arising from services provided to patients in the ordinary course of business. Management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position or results of operations.

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Note 13. FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 820, which defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The carrying amounts reported in the consolidated condensed balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments.

The fair value of debt under ASC 820 is not the settlement amount of the debt, but is based on an estimate of what an entity might pay to transfer the obligation to another entity with a similar credit standing. Observable inputs for the Company’s debt such as quoted prices in active markets are not available, as the Company’s long-term debt is not publicly-traded. Accordingly, the Company has estimated the fair value amounts using available market information and commonly accepted valuation methodologies. However, it requires considerable judgment in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimate presented is not necessarily indicative of the amount that the Company or holders of the debt instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

The fair value of the Company’s convertible debt was calculated based on an estimate of the present value of the debt payments combined with an estimate of the value of the conversion option, using the Black-Scholes option pricing model. For the Company’s other long-term debt, the fair value was calculated based on an estimate of the present value of the debt payments. As of September 30, 2013, the carrying value of the Company’s convertible debt, net of debt discount, and the debt outstanding for the IFC 2005 RMB Loan, IFC 2013 loan, DEG 2013 loan and Exim loan was $44.2 million, and the estimated fair value was $45.5 million. The carrying amounts of the remaining debt instruments approximate fair value, as the instruments are subject to variable rates of interest or have short maturities.

Note 14. SUBSEQUENT EVENT

The Company’s JPM Tranche C Convertible Notes due 2017 in the principal amount of $15 million had a ten-year maturity, bore no interest of any kind and were convertible at any time and would be automatically converted upon the (i) completion of two proposed new and/or expanded hospitals in China in Beijing and Guangzhou (the “JV Hospitals”), (ii) the first anniversary of commencement of operations at either of the JV Hospitals or (iii) the first anniversary of either of the JV Hospitals achieving break-even earnings before interest, taxes, depreciation and amortization for any 12-month period ending on the last day of a fiscal quarter, subject to compliance with certain JPM Financing provisions. The operations of the first JV hospital in Beijing commenced on October 15, 2012. As the first anniversary occurred on October 15, 2013, the Tranche C Notes automatically converted. Accordingly, the $15 million debt was converted into 808,189 common shares, and the debt was extinguished.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained in this quarterly report on Form 10-Q relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking information is

23

inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth under the heading “Risk Factors” and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential,” or “continue” or similar terms or the negative of these terms. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.

Critical Accounting Policies

The preparation of the consolidated condensed financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Areas in which significant judgments and estimates are used include revenue recognition, receivable collectability, stock based compensation and deferred tax valuation allowances.

RESULTS OF OPERATIONS

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Overview of Consolidated Results

We own and operate the United Family Healthcare network of private hospitals and clinics in the People’s Republic of China. United Family Healthcare currently operates hospitals and affiliated clinic facilities in the Beijing, Shanghai, Tianjin and Guangzhou markets. Our network operations in the Beijing, Shanghai and Guangzhou markets have earned the accreditation of the Joint Commission International. Our current network operations include the following facilities:

• Beijing Market

• Beijing United Family Hospital main campus

• 120 licensed beds

• As of the close of the recent period, 70 available beds

• United Family Rehabilitation Hospital

• 101 licensed beds

• As of the close of the recent period, 15 available beds

• Four affiliated satellite clinics

• Shanghai Market

• Shanghai United Family Hospital main campus

• 50 licensed beds

• As of the close of the recent period, 30 available beds

• Two affiliated satellite clinics

• Two managed clinics

• Tianjin Market

• Tianjin United Family Hospital main campus

• 26 licensed beds

• As of the close of the recent period, 25 available beds

• Guangzhou Market

• One affiliated clinic

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We have undertaken a number of market expansion projects in our current markets:

Beijing. The expansion projects have opened and continue to develop in Beijing in 2013-2014 comprise a variety of increased services including comprehensive cancer care, neurosurgery, orthopedic surgery, cath lab and cardiovascular surgery. In June 2013, we opened the United Family Rehabilitation Hospital in Beijing, which is a new 101 licensed bed, 124,000 square foot facility adjacent to a large park in east Beijing. Our expansion of services into the premium rehabilitation market fills an existing void in China’s health care system for those seeking quality premium care when recovering from surgeries or debilitating illnesses in the neurological, cardiac and orthopedic areas. In addition, we have recently begun a multi-phase expansion into the west side of Beijing. This expansion is planned to include a large outpatient clinic in the financial center of west Beijing and a planned 80 bed comprehensive care hospital to be brought into operation over the 2015 – 2016 period in the affluent Haidian district.

Shanghai. In Shanghai in 2013, we plan to continue to expand service offerings at our main Puxi campus and expand operations in Pudong. In July 2013, we opened the United Family Quankou Clinic, a large facility expansion adjacent to our main Shanghai United Family Hospital in Puxi which provides space for continuing growth in both inpatient and outpatient services at our Puxi campus.

Tianjin. In 2011, we opened our first United Family Hospital in a second tier city, Tianjin. The facility is licensed for 26 beds and is designed to focus on primary care services. Expansion in the Tianjin market is planned through development of a satellite clinic in another affluent district of the city.

Guangzhou. In the southern tier one city of Guangzhou, we are developing plans for a new comprehensive care United Family hospital of approximately 200 beds. Development is underway and is expected to proceed through 2015 with facility opening currently estimated for 2016 (see “Liquidity and Capital Resources – Capital Resources and Financing Requirements”).

Qingdao. Following Tianjin, our expansion into second tier Chinese cities will continue in the affluent port city of Qingdao in Shandong Provence. We have secured a location and begun design work on the project which is planned to be a comprehensive care facility of approximately 80 beds, currently estimated to open over the 2015 – 2016 period.

Managed Services. We have begun to roll out management services leveraging the brand value of United Family Healthcare. Our managed clinics in Wuxi and Pudong allow us to expand the UFH market penetration rapidly and in both cases have supplemented the metropolitan Shanghai area market owned UFH facilities. We are currently exploring opportunities for managed service facilities in the large second tier cities of Chengdu, Nanjing and Hangzhou. We are hopeful that this business model will provide significant incremental benefit to our financial results in the coming years.

In connection with the expansion plans outlined above, over the next twelve months we have planned capital expenditures of up to $46 million for construction, equipment and information systems (see “Liquidity and Capital Resources”). During the three months ended September 30, 2013, the development, pre-opening and start-up expenses, including post-opening expenses, for these projects were $4,912,000 compared to $2,716,000 in the prior period, reflecting primarily expenses incurred for the Beijing, Pudong and Tianjin projects.

The Chinese Government’s healthcare reform program encourages private development, such as our United Family network, as the primary source for providing specialty and premium healthcare services within the Chinese healthcare system. Nevertheless, expansions of our existing facilities as well as new hospital and affiliated clinic projects are complex, requiring several phases over extended periods of time. The projects are subject to delays routinely encountered in complex construction projects in regulated industries and are subject to, among other things, the receipt of (i) medical-related approvals from local health authorities and in some cases the Ministry of Health at the national level, (ii) foreign invested joint venture health facility approvals from the local Bureau of Commerce and Trade, and (iii) local construction and safety approvals. Accordingly, we give windows of expected completion of our expansion projects, the exact timing of which are subject to the actual receipt of the various government licenses and permits.

Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the three months ended September 30, 2013 compared to the comparable prior year period.

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Net Revenue

(in thousands)

	Three months ended September 30,
	2013		2012		Change
Healthcare services net revenue	$	43,058	$	37,299		15	%

Our healthcare services revenue for the three months ended September 30, 2013 was $43,058,000, a 15% increase from the three months ended September 30, 2012 revenue of $37,299,000. The increase in net revenue is attributable to growth in both inpatient and outpatient services.

The table below identifies the relative contribution of inpatient and outpatient services to gross revenue:

	Three months ended September 30,
	2013			2012
Inpatient/Outpatient gross revenue percentages
Inpatient services as percent of gross revenue		44	%		44	%
Outpatient services as percent of gross revenue		56	%		56	%
		100	%		100	%

The table below identifies the primary service lines contributing to gross revenue:

	Three months ended September 30,
	2013			2012
Gross revenue by service line (hospital facilities only):
Surgical services		21.5	%		20.8	%
OB/GYN		17.0	%		17.2	%
Pediatrics		8.8	%		8.4	%
Ancillary services
Laboratory		9.4	%		9.6	%
Radiology		10.2	%		10.2	%
Pharmacy		11.5	%		11.6	%
Internal Medicine		3.6	%		4.7	%
Emergency Room		3.9	%		3.8	%
Dental		2.4	%		2.0	%
Family Medicine		1.6	%		1.6	%
All other services		10.1	%		10.1	%
		100	%		100	%

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Operating expenses

(in thousands)

	Three months ended September 30,
	2013		2012		Change
Salaries, wages and benefits	$	26,170	$	21,064		24	%
Other operating expenses		7,690		5,595		37	%
Supplies and purchased medical services		5,396		4,532		19	%
Bad debt expense		1,084		865		25	%
Depreciation and amortization		2,842		1,797		58	%
Lease and rental expense		2,650		1,915		38	%
	$	45,832	$	35,768		28	%

Salaries, wages and benefits increased 24% in the recent period compared to the comparable prior year period primarily due to the increased headcount of 13.6% associated with the revenue increases and development activities as well as certain government mandated increases in social benefits. The increase in headcount was due to both increased activities in our existing facilities as well as for hiring new personnel to staff our expanded Beijing facilities, primarily the new Rehabilitation Hospital.

Other operating expenses increased by $2,095,000, or 37%, primarily due to increased legal fees of $948,000, other professional fees of $518,000, office supplies and noncapitalized furniture of $401,000 at the new Rehabilitation Hospital, contributions of $176,000 and training of $121,000.

Supplies and purchased medical services increased by $864,000, or 19%, due to increased usage of medical supplies of $869,000, or 21% offset by decreased pharmaceuticals related to a decreased number of patient procedures of approximately $5,000, or 1%.

Bad debt expense increased by $219,000, and, as a percentage of net revenue, bad debt expense was 2.5% in 2013, compared to 2.3% in the prior year period, both of which are in line with our historic averages.

Depreciation and amortization expense increased by $1,045,000, or 58% to $2,842,000, primarily due to the opening of expanded facilities.

Lease and rental expense increased to $2,650,000 in the recent period compared to $1,915,000 in the prior year period, primarily due to the increase in the total building space utilized in the expanded operations of our hospital and clinic network.

Other Income and Expenses

Interest income during the three months ended September 30, 2013 and 2012 was $246,000 and $214,000, respectively, primarily due to additional funds earning interests during the period.

Interest expense during the three months ended September 30, 2013 and 2012 was $424,000 and $141,000, respectively, primarily due to increases of new loans.

Equity in income of unconsolidated affiliates was $52,000 for the three months ended September 30, 2013. Equity in loss of unconsolidated affiliates was ($785,000) for the three months ended September 30, 2012. This represents our interest in the net income (loss) of CML.

Taxes

We recorded a provision for taxes of $1,035,000 for the three months ended September 30, 2013, compared to a provision for taxes of $1,478,000 for the three months ended September 30, 2012. The effective tax rate for our operating entities was 35% compared to 36% in the comparable prior year period. The remaining portion of the variance in the effective tax rate in the current period is primarily due to the effect of losses in start-up entities and corporate entities for which we cannot recognize tax benefit.

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Nine months ended September 30, 2013 compared to Nine months ended September 30, 2012

Overview of Consolidated Results

In connection with the expansion plans outlined above, over the next twelve months we have planned capital expenditures of up to $46 million for construction, equipment and information systems (see “Liquidity and Capital Resources”). During the nine months ended September 30, 2013, the development, pre-opening and start up expenses, including post-opening expenses, for these projects were $10,463,000 compared to $8,457,000 in the comparable prior year period, reflecting primarily expenses incurred for the Beijing, Tianjin and Pudong projects.

The Chinese Government’s healthcare reform program encourages private development, such as our United Family network, as the primary source for providing specialty and premium healthcare services within the Chinese healthcare system. Nevertheless, expansions of our existing facilities as well as new hospital and affiliated clinic projects are complex, requiring several phases over extended periods of time. The projects are subject to delays routinely encountered in complex construction projects in regulated industries and are subject to, among other things, the receipt of (i) medical-related approvals from local health authorities and in some cases the Ministry of Health at the national level, (ii) foreign invested joint venture health facility approvals from the local Bureau of Commerce and Trade, and (iii) local construction and safety approvals. Accordingly, we give windows of expected completion of our expansion projects, the exact timing of which are subject to the actual receipt of the various government licenses and permits.

Our discussion and analysis below relates to the revenue and expenses of our healthcare services business for the nine months ended September 30, 2013 compared to the comparable prior year period.

Net Revenue

(in thousands)

	Nine months ended September 30,
	2013		2012		Change
Healthcare services net revenue	$	130,600	$	108,928		20	%

Our healthcare services revenue for the nine months ended September 30, 2013 was $130,600,000, a 20% increase from the nine months ended September 30, 2012 revenue of $108,928,000. The increase in net revenue is attributable to growth in both inpatient and outpatient services.

The table below identifies the relative contribution of inpatient and outpatient services to gross revenue:

	Nine months ended September 30,
	2013			2012
Inpatient/Outpatient gross revenue percentages
Inpatient services as percent of gross revenue		43	%		41	%
Outpatient services as percent of gross revenue		57	%		59	%
		100	%		100	%

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The table below identifies the primary service lines contributing to gross revenue:

	Nine months ended September 30,
	2013			2012
Gross revenue by service line (hospital facilities only):
Surgical services		21.8	%		20.4	%
OB/GYN		15.4	%		16.0	%
Pediatrics		8.2	%		8.4	%
Ancillary services
Laboratory		9.1	%		9.5	%
Radiology		10.5	%		10.6	%
Pharmacy		11.7	%		12.1	%
Internal Medicine		3.8	%		4.5	%
Emergency Room		4.0	%		4.1	%
Dental		3.1	%		2.7	%
Family Medicine		1.5	%		1.7	%
All other services		10.9	%		10.0	%
		100	%		100	%

Operating expenses

(in thousands)

	Nine months ended September 30,
	2013		2012		Change
Salaries, wages and benefits	$	75,667	$	60,989		24	%
Other operating expenses		19,156		15,704		22	%
Supplies and purchased medical services		15,951		13,582		17	%
Bad debt expense		3,203		2,260		42	%
Depreciation and amortization		7,497		5,268		42	%
Lease and rental expense		7,421		5,602		32	%
	$	128,895	$	103,405		25	%

Salaries, wages and benefits increased 24% in the recent period compared to the comparable prior year period primarily due to the increased headcount of 19.4% associated with the revenue increases and development activities as well as certain government mandated increases in social benefits. The increase in headcount was due to both increased activities in our existing facilities as well as for hiring new personnel to staff our expanded Beijing facilities, primarily the new Rehabilitation Hospital.

Other operating expenses increased by $3,452,000, or 22%, primarily due to increased legal fees of $1,437,000, other professional fees of $950,000, office supplies and noncapitalized furniture of $568,000 at the new Rehabilitation Hospital, advertising of $188,000, contributions of $171,000 and training of $145,000, partially offset by the increase of foreign exchange gains of $651,000.

Supplies and purchased medical services increased by $2,369,000, or 17% due to increased usage of medical supplies of $2,456,000, or 20% offset by decreased pharmaceuticals related to a decreased number of patient procedures of approximately $87,000, or 6%.

Bad debt expense increased by $943,000 and, as a percentage of net revenue, bad debt expense was 2.5% in 2013, compared to 2.0% in the comparable prior year period, both of which are in line with our historic averages.

Depreciation and amortization expense increased by $2,229,000, or 42% to $7,497,000, primarily due to the opening of expanded facilities.

Lease and rental expense increased to $7,421,000 in the recent period compared to $5,602,000 in the prior year period, primarily due to the increase in the total building space utilized in the expanded operations of our hospital and clinic network.

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Other Income and Expenses

Interest income during the nine months ended September 30, 2013 and 2012 was $735,000 and $487,000, respectively, primarily due to additional funds earning interests during the period.

Interest expense during the nine months ended September 30, 2013 and 2012 was $752,000 and $356,000, respectively, primarily due to increases of new loans.

Equity in loss of unconsolidated affiliates was $1,235,000 and $573,000 for the nine months ended September 30, 2013 and 2012, respectively. This represents our interest in the net loss of CML.

Taxes

We recorded a provision for taxes of $4,609,000 for the nine months ended September 30, 2013, compared to a provision for taxes of $4,461,000 for the nine months ended September 30, 2012. The effective tax rate for our operating entities was 32% compared to 30% in the comparable prior year period. The remaining portion of the variance in the effective tax rate in the current period is primarily due to the effect of losses in start-up entities and corporate entities for which we cannot recognize tax benefit.

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth our cash and accounts receivable as of September 30, 2013 and December 31, 2012 (in thousands):

	September 30, 2013		December 31, 2012
Cash and cash equivalents	$	32,624	$	33,184
Accounts receivable		21,146		19,564
Receivables from affiliates		2,995		2,110

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Cash Flows

The following table sets forth a summary of our cash flows from operating activities for the nine months ended September 30, 2013 and 2012 (in thousands):

	Nine months ended September 30,
	2013			2012
OPERATING ACTIVITIES
Net (loss) income	$	(4,009	)	$	615
Non cash items		14,384			11,245
Changes in operating assets and liabilities:
Accounts receivable		(4,307	)		(5,977	)
Receivable from affiliates		(885	)		(744	)
Inventories of supplies		(577	)		(51	)
Accounts payable, accrued expenses and other current liabilities		(2,784	)		2,734
Payable to affiliates		973			2,287
Income tax payable		(1,253	)		(274	)
Other current assets and other assets		(733	)		(354	)
Net cash provided by operating activities	$	809		$	9,481

Operating cash flow for the nine months ended September 30, 2013 was lower than the nine months ended September 30, 2012, primarily due to the net loss, decreases in accounts payable, largely due to the construction related payments for the Rehabilitation Hospital project (now completed) and the increases of tax payments.

The following table sets forth a summary of our cash flows from investing activities for the nine months ended September 30, 2013 and 2012 (in thousands):

	Nine months ended September 30,
	2013			2012
INVESTING ACTIVITIES
Proceeds from redemption of CDs	$	—		$	26,530
Purchases of property and equipment		(10,896	)		(21,986	)
Net cash (used in) provided by investing activities	$	(10,896	)	$	4,544

Investing activities for the nine months ended September 30, 2013 and 2012 included acquisitions of property and equipment in connection with our ongoing development and expansion of the United Family Healthcare network of private hospitals and clinics. Investing activities for the nine months ended September 30, 2012 also included redemption of Certificates of Deposit.

The following table sets forth a summary of our cash flows from financing activities for the nine months ended September 30, 2013 and 2012 (in thousands):

	Nine months ended September 30,
	2013			2012
FINANCING ACTIVITIES
Restricted cash from (to) IFC RMB loan sinking funds	$	446		$	(10,940	)
Restricted cash for Exim loan collateral		—			(8,957	)
Proceeds from debt		11,000			—
Repayment of debt		(1,596	)		—
Payment for debt issuance cost		(441	)		—
Repurchase of restricted stock for income tax withholding		(311	)		(151	)
Proceeds from exercise of stock options		464			16
Net cash provided by (used in) financing activities	$	9,562		$	(20,032	)

As of September 30, 2013, the Company received proceeds from the 2013 IFC and DEG loan of $11 million, and the Company also utilized cash to fund the IFC RMB loan sinking funds of $446,000 and to make a principal payment for the Exim loan of $1,596,000. As of September 30, 2012, the Company utilized cash to fund the IFC RMB loan sinking fund of $11 million and to fund restricted cash for Exim loan collateral of $9 million.

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Capital Resources and Financing Requirements

Over the next twelve months, we anticipate total capital expenditures of up to approximately $46 million related to the maintenance and expansion of our business operations. Of this amount, up to approximately $8 million would be for maintenance and organic growth at our existing facilities in Beijing and Shanghai, and up to approximately $6 million would be primarily related to network IT investment. Expansion projects would be expected to account for up to approximately $32 million of the remaining expenditures. These include final payments related to the opening of the Tianjin hospital of approximately $1 million, payments related to the opening of the Beijing Rehabilitation project of approximately $4.3 million, payments related to clinic expansion in Beijing and Shanghai market of approximately $5.9 million, design and construction expenditures related to the Qingdao hospital project of up to $5.8 million. Design and construction expenditures for the Haidian clinic project of up to $11 million and design and construction expenditures for the Guangzhou hospital project of up to $4 million. We intend to fund these expenditures through corporate capital reserves, anticipated loan financings as described below and cash flow from operations. Registered foreign debt is expected to be secured by each operating foreign invested joint venture upon obtaining required governmental and credit approvals.

The expansion projects in the Beijing, Shanghai, Tianjin, Qingdao and Guangzhou markets are underway in various states of progress. In particular, due to the timing of the development process for the planned joint venture hospitals in Guangzhou and Haidian, significant construction expenditures for those projects are not expected until 2015 and beyond.

Over the past 12 months, we have secured approximately $22 million in long term loan financing for our expansion projects in Beijing. In March 2013, we entered into US Dollar loan facilities with International Finance Corporation (IFC) and Deutsche Investitions und Entwicklungsgesellschaft (DEG) for the financing of the expansion projects at our flagship hospital in Beijing. In June 2013, we drew down the entire $11 million in the aggregate from these facilities ($6 million from IFC and $5 million from DEG). The obligations of the borrower (our United Family Hospital) under both the IFC and DEG facilities are guaranteed by Chindex and secured by a pledge of Chindex’s ownership interest in the borrower.

In addition, we have submitted proposals to the IFC for additional loans of approximately $12 million related to the development of our Rehabilitation Hospital in Beijing. There can be no assurances as to the amounts, if any, that may be finally available under this loan or other facilities or whether such loan or other facilities will be finally achievable on terms acceptable to us and the lenders. If the ongoing negotiations are unsuccessful and this loan or other facilities are not obtained for expansion projects, then, in the absence of alternative sources of financing, there could result a material adverse effect on our operations and our ability to complete our proposed expansion projects on time or at all.

In addition, in October 2012, we completed the drawdown of $11.1 million in loans at our hospital facilities in Beijing secured in part by U.S. Export-Import Bank guarantees. The loans were used for the purchase of medical equipment at our newly expanded facilities in Beijing, allowing us to import equipment into China at substantial savings due to duty and value added tax (VAT) exemptions. The loans have terms of seven years, an interest rate of 2.15% and required a collateral cash deposit of approximately $9.2 million.

We are currently in the final stages of drawing down an additional $12 million in long term from the IFC pursuant to the 2007 Loan Agreement. The borrower for this debt will be our Rehabilitation hospital.

To provide long term capital resources for our development projects we are engaged in negotiations with the IFC and other potential creditors or investors of debt or equity based financing. There can be no assurances as to the amounts, if any, that may be finally available as a result of these negotiations or whether financing resulting from these negotiations will be finally achievable on terms acceptable to us and the lenders or investors. If the ongoing negotiations are unsuccessful and this loan or other facilities are not obtained for expansion projects, then, in the absence of alternative sources of financing, there could result a material adverse effect on our operations and our ability to complete our proposed expansion projects on time or at all.

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Since the financial events of 2007, there have been continuing and significant disruptions in the world financial markets including those in China. We have not experienced significant negative impacts to operating activities as a result of these events. We have taken steps to ensure the security of our cash and investment holdings through deposits with highly liquid, global banking institutions. Our daily operations generate significant operating cash flows and have not been dependent upon credit availability. Our patient base in our current facilities are by and large considered to be in the wealthiest segment of society, for whom healthcare spending represents a very small percentage of their income and therefore is expected to be less impacted by an economic slowdown and to the extent their assets are affected, this will likely not impact their decision making on healthcare purchases. Our current expansion projects as described above are expected to be funded with corporate capital reserves, cash flow from operations and credit facilities provided that there can be no assurances that such facilities will be established, available or sufficient for our intended purposes or that the preconditions to disbursements under the facilities will be satisfied.

Based on the foregoing, we believe that our existing capital resources are sufficient to fund our working capital and capital expenditure requirements for the next 12 months, although there can be no assurances to this effect. We will require additional financing arrangements to meet our capital expenditures beyond this period. We will continue to evaluate a wide range of such opportunities, including both debt and equity-based financings in which we may borrow funds and/or share with one or more financial, institutional or strategic partners the ownership interest in one or more projects.

We currently do not have and may not be able to raise adequate capital to complete certain or all of our business strategies, including our ongoing expansion projects, or to react rapidly to changes in technology, products, services or the competitive landscape. We currently do not expect cash flow from operations to be sufficient to fund all of our currently existing and proposed expansion projects. Healthcare service and medical product providers in China often face high capital requirements in order to take advantage of new market opportunities, respond to rigorous competitive pressures and react quickly to changes in technology. Many of our competitors are committing substantial capital and, in many instances, are forming alliances to acquire or maintain market leadership. There can be no assurance that we will be able to satisfy our capital requirements in the future. In particular, our strategy of expanding our healthcare facilities and services includes the establishment and maintenance of healthcare facilities, which require particularly significant capital. In addition, CML plans to expand its distribution and manufacturing capabilities for medical products. With the strategy and goal of capitalizing on immediate opportunities in the evolving healthcare environment in China, we have in the past and likely in the future will consider and commence expansion projects that require and depend on the availability of significant capital, not all of which is available at the time of such consideration or commencement. In the absence of sufficient available or obtainable capital, we would be unable to establish or maintain healthcare facilities as planned or commenced, we may incur costs for projects that may not be completed as projected (if at all) and we may be required to seek capital in financings under circumstances and at times that limit the optimization of the terms of such financings.

TIMING OF REVENUES

Our revenue is dependent on seasonal fluctuations related to epidemiology factors and the life styles of the expatriate community. For example, many expatriate families traditionally take annual home leave outside of China during the summer months. As a result of these factors impacting the timing of revenues, our operating results have varied and are expected to continue to vary from period to period and year to year.

FOREIGN CURRENCY EXCHANGE AND IMPACT OF INFLATION

Because we receive 100% of our revenue and generate approximately 96% of our expenses within China, we have foreign currency exchange risk. The Chinese currency (RMB) is not freely traded and is closely controlled by the

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Chinese Government. The U.S. dollar (USD) has experienced volatility in world markets recently. During the nine months ended September 30, 2013, the RMB appreciated approximately 2.19% against the USD, resulting in an exchange gain of $372,000.

As part of our risk management program, we also perform sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. Our sensitivity analysis of changes in the fair value of the RMB to the USD at September 30, 2013, indicated that if the USD uniformly increased in value by 10% relative to the RMB, we would have experienced $150,000 increase in net loss. Conversely, a 10% increase in the value of the RMB relative to the USD at September 30, 2013, would have resulted in $183,000 decrease in net loss.

Based on the Consumer Price Index, for the three months ended September 30, 2013, the average annual rate of inflation in China and the United States was 2.8% and 1.6%, respectively. For the nine months ended September 30, 2013, the average annual rate of inflation in China and the United States was 2.5% and 1.5%, respectively. The average annual rate of inflation over the three-year period from 2010 to 2012 was 3.8% in China and 2.3% in the United States.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company holds the majority of all cash assets in Certificates of Deposit in major international banks. Therefore, the Company believes that its market risk exposures are immaterial and reasonable possible near-term changes in market interest rates will not result in material near-term reductions in other income, material changes in fair values or cash flows. The Company does not have instruments for trading purposes. Instruments for non-trading purposes are operating and development cash assets held in interest-bearing accounts. The Company is exposed to certain foreign currency exchange risk (See “Foreign Currency Exchange and Impact of Inflation”).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. A control deficiency exists when the design or operation of a control does not allow management or employees, in the ordinary course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with GAAP, such that there is a more than remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our CEO and CFO have concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

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Changes in Internal Control over Financial Reporting

Our management, including our principal executive and principal financial officers have evaluated any changes in our internal control over financial reporting that occurred during the three months ended September 30, 2013, and has concluded that there was no change that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1	Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013.
3.2	Amended and Restated Bylaws of the Company dated as of December 19, 2012. Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed December 26, 2012.
3.3	Certificate of Designations of Series A Junior Participating Preferred Stock of the Company. Incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

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4.1	Form of Specimen Certificate representing the Common Stock of the Company. Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form SB-2 (No. 33-78446) (the “IPO Registration Statement”).
4.2	Form of Specimen Certificate representing the Class B Common Stock of the Company. Incorporated by reference to Exhibit 4.3 to the IPO Registration Statement.
4.3	Rights Agreement, dated as of June 7, 2007, between the Company and American Stock Transfer & Trust Company, as Rights Agent, which includes a form of Right Certificate as Exhibit B and a Summary of Rights to Purchase Preferred Stock as Exhibit C. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 7, 2007.
4.4	Amendment No. 1 to Rights Agreement, dated as of November 4, 2007, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed November 7, 2007.
4.5	Amendment No. 2 to Rights Agreement, dated as of June 8, 2010, between the Company and American Stock Transfer & Trust Company, as Rights Agent. Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 14, 2010.
10.1	Amendment, dated as of September 3, 2013, to Amended and Restated Employment Agreement, dated as of January 1, 2012, between the Company and Robert Low (filed herewith).
31.1	Certification of the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a) (filed herewith)
31.2	Certification of the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a) (filed herewith)
31.3	Certification of the Company’s Principal Accounting Officer Pursuant to Rule 13a-14(a) (filed herewith)
32.1	Certification of the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith)
32.2	Certification of the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith)
32.3	Certification of the Company’s Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith)
101.INS	XBRL Instance Document (filed herewith)
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINDEX INTERNATIONAL, INC.
Dated: November 12, 2013	By: /s/ Lawrence Pemble
	Lawrence Pemble
	Chief Operating Officer and Director
Dated: November 12, 2013	By: /s/ Robert C. Low
	Robert C. Low
	Senior Vice President of Finance, Chief Financial Officer, and Corporate Controller
	(Principal Financial and Accounting Officer)

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